Lawyers speak in legalese (though the best lawyers do so mostly to only each other and use plain English when speaking with their clients). Tech professionals speak in Java, Python, and other programming languages. Accountants speak in numbers.
The good news is that you can live your life, invest your money, and run your business without learning a thing about computer programming. You can also avoid the need to understand too much about the law, depending on your business and how sophisticated your investment activities are.
Finance and accounting, not so much. If you don’t know your numbers, you don’t know your business.
Regardless of how natural a salesperson you are, how great your product or service is, or how perfect your location is, you need to understand at least the basics of finance and accounting – meaning, at least enough to help you keep up with your bookkeeper or accountant when they speak.
This series is for you if: you own or operate a business; or, if you are involved in managing your investments and you don’t feel comfortable around numbers. This article and the installments that follow are not going to make you an expert at this stuff. They will help you, however, to understand financial statements well enough to avoid:
By reading this series of articles, you will better understand:
Accounting and finance will never be scintillating cocktail party banter; however, this series shouldn’t bore you, because it’s not going to try to make an accountant out of you. Rather, it’s just going to help you work with your accounting/financial advisors to make better business decisions.
The average accounting/financial person is good with numbers, but the average business owner/investor is not. Information, simply stated, gets lost in translation. Accounting/financial professionals are not going to change, so if you want to understand them, you need to learn at least enough of their language to get along as a tourist.
For example, at the end of the year, you see that your company’s total sales were $10 million, and your net income was $1,000,000. So you think, wow, the company did great this year. However, when you look at your cash account, it’s zero, and you have no money to pay your creditors. Where did all your profit go? This can get even more confusing if you are using the wrong words to describe a number. For example gross profit and net income are not the same thing. If you ask your bookkeeper for one but you meant the other, it is not her fault that she cannot read your mind. Understanding at least the basic accounting vocabulary is your job, too.
Also, although the expression “numbers don’t lie” is true, like the written word, numbers can be interpreted differently by different people. If you don’t know enough of the basics then you are less likely to be able to form your own interpretations and are more likely to have to rely blindly on the interpretations of others.
Accountants typically prepare financial statements in accordance with generally accepted accounting principles (GAAP) in the United States, based on information provided by the client. Read more about GAAP in Installment #2. This standardizes the language so that it can be generally understood by everyone. Financial Statements, in turn, enable you to:
And, when your golf buddies are talking about “dry powder” on the links, you’ll know it has nothing to do with actual powder. (Need a hint? Dry powder is a term for extra cash reserves that can be used for future investments. Now go make that birdie.)
If you learned something by reading this, then stay with us. The concepts are not difficult. In fact, the SEC states, on its website: “If you can read a nutrition label or a baseball box score, you can learn to read basic financial statements. If you can follow a recipe or apply for a loan, you can learn basic accounting. The basics aren’t difficult and they aren’t rocket science.”
Hopefully this initial installment of our “Know Thy Numbers” series demonstrates the importance of understanding financial information. Once you do, you will be able to better identify and fix weaknesses, capitalize on strengths, and predict changes before they happen. In the next installment of this series, we’ll start at the very foundation of all financial information: GAAP and basic accounting concepts. You’ll learn the guidelines that accountants must follow to present accurate, transparent financial information, as well as the definitions of the most important terminology found in financial statements.
Jonathan Friedland is an attorney and entrepreneur. He founded DailyDAC in 2010 and launched Financial Poise in 2013. For more information on his legal practice, click here.
Kristina Parren is an associate editor with Financial Poise. Since graduating from the University of Michigan in film and screenwriting, she has worked as a copywriter and grant writer across multiple industries, including healthcare, finance, manufacturing and travel. In addition to her work as an editor and copywriter, she is an avid wildlife conservation activist,…
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